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Non-Reportable IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL  NO(S). 8103/2009

COMMR.OF INCOME TAX,RAJKOT                         Appellant(s)                                 VERSUS GOVINDBHAI MAMAIYA                                 Respondent(s)

WITH CIVIL APPEAL No. 8104/2009 CIVIL APPEAL No. 8105/2009 CIVIL APPEAL No. 8106/2009 CIVIL APPEAL No. 8107/2009 CIVIL APPEAL No. 8108/2009 CIVIL APPEAL No. 8109/2009 CIVIL APPEAL No. 8110/2009

J U D G M E N T

A.K. SIKRI, J.

The question of law that arises for consideration in all  these appeals which are filed by the Commissioner of Income Tax,  Rajkot (hereinafter referred to as the 'Revenue') is common.  The  respondents  in  all  these  appeals  are  also  common.   The  three  respondents  (hereinafter  referred  to  as  the  'assessee')  are  brothers.  The issue raised is identical in all these appeals which  pertains to different assessment years and that is the reason that  there are eight appeals before us.  For the sake of convenience, we  will refer to the facts emerging from the records of Civil appeal  No.8103 of 2009.

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2. The respondents are three brothers.  Their father died  leaving the land admeasuring 17 acres and 11 gunthas to the three  brothers and two other persons who relinquished their rights in  favour of the three brothers.  A part of this bequeathed land was  acquired by the State Government and compensation was paid for it.  On  appeal,  the  compensation  amount  was  enhanced  and  additional  compensation alongwith interest was awarded.

3. The respondents filed their return of income for each  assessment  years  claiming  the  status  of  'individual'.   Two  questions arose for consideration before the Assessing Officer. One  was as to whether these three brothers could file separate returns  claiming the status of the 'individual' or they were to be treated  as 'Association of Persons' (AoP).  Second question was regarding  the taxability of the interest on enhanced compensation and this  interest which was received in a particular year was to be assessed  in the year of receipt or it could be spread over the period of  time.

4. Without going into the detail as to how this question  traversed and decided by one forum to other, suffice it is to state  that  the  Assessing  Officer  had  passed  the  assessment  order  by  treating their status as that of a AoP.  The Assessing Officer had  also  refused  to  spread  the  interest  income  over  the  years  and  treated it as taxable in the year of receipt.  Ultimately, the High  Court has decided that these persons are to be given the status of  'individual' and assessed accordingly and not as AoP and that the

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interest income is to be spread over from the year of dispossession  of land, that is the assessment year 1987-88 till the year of  actual payment which was received in the assessment year 1999-2000  applying  the  principles  of  accrual  of  income.   It  is  in  this  backdrop that the Revenue has approached this Court challenging the  decision of the High Court.

5. Insofar as the treatment of the respondents giving the status  of 'individual' and assessing on that basis is concerned, the issue  is no more res integra.  Learned counsel for the Revenue candidly  and fairly conceded that this aspect stands conclusively determined  by various judgments.  It would be suffice to refer to the judgment  of this Court in  Meera and Company, Ludhiana vs. Commissioner of  Income  Tax,  Punjab,  J  &  K  and  Chandigarh,  Patiala reported  in  (1997) 4 SCC 677.  After taking note of some previous judgments on  this issue, the Court summed up the legal position in paras 19 and  20 which are reproduced below::

“19. In the case of  CIT v. Indira Balkrishna, AIR  1960 SC 1172, this Court held that "association of  persons" meant an association in which two or more  persons joined in a common purpose or common action.  As the words occurred in a section which imposed a  tax  on  income,  the  association  must  be  one  the  object of which was to produce income, profits or  gains.   In  that  case,  the  co-widows  of  a  Hindu  governed  by  Mitakshara  law  inherited  his  estate  which  consisted  of  immovable  properties,  shares,  money lying in deposit and a share in a registered  firm. The Appellate Tribunal found that they had not  exercised their right to separate enjoyment and that

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except for jointly receiving the dividends from the  shares and the interest from the deposits, they had  done no act which had helped to produce income. This  Court held that the co-widows succeeded as co-heirs  to the estate of the deceased husband. It was held  that since the widows had an equal share in the  income from immovable properties, Section 9(3) of  the Indian Income Tax Act, 1922 will apply. So far  as other incomes were concerned, it was held:

"Coming  back  to  the  facts  found  by  the  Tribunal, there is no finding that the three  widows have combined  in a joint enterprise to  produce income. The only finding is that they  have  not  exercised  their  right  to  separate  enjoyment,  and  except  for  receiving  the  dividends  and  interest  jointly,  it  has  been  found  that  they  have  done  no  act  which  has  helped  to  produce  income  in  respect  of  the  shares  and  deposits.  On  these  findings  it  cannot be held that the three widows had the  status of an association of persons within the  meaning of section 3 of the Indian Income Tax  Act."  

20. The meaning of "an association of persons"  was also examined by this Court in the case of G.  Murugesan & Brothers v. CIT, (1973) 4 SCC 211. It  was  held  in  that  case  that  an  association  of  persons  could  be  formed  only  when  two  or  more  individuals  voluntarily  combined  together  for  certain  purposes.  Volition  on  the  part  of  the  members  of  the  association  was  an  essential  ingredient. It was further held that even a minor  could  join  "an  association  of  persons"  if  his  lawful  guardian  gave  his  consent.  The  income  in  that case arose under two heads - house property  and dividends from shares. The question before this  Court  was  whether  the  dividend  income  should  be  assessed in the hand of an association of persons

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or  individuals.  One  Sinnamani  Nadar  executed  a  settlement deed in favour of his four grandsons.  The  property  covered  by  the  settlement  deed  comprised of a house property which had been let  out and some shares. The donees were to enjoy the  income of these properties during their lifetime.  Thereafter, the properties were to devolve on their  children. In that case, it was pointed out that  Income  Tax  return  was  filed  in  the  status  of  association of persons prior to the assessment year  1959-60 to 1962-63, the returns were submitted as  individuals  specifically  stating  that  the  donees  were not functioning as an association of persons.”  

6. In the present case, the admitted facts are that the property  in  question  which  was  acquired  by  the  Government,  came  to  the  respondents on inheritance from their father i.e. by the operation  of law.  Furthermore, even the income which is earned in the form  of interest is not because of any business venture of the three  assessees but it is the result of the act of the Government in  compulsorily acquiring the said land.  In these circumstances, the  case is squarely covered by the ratio of the judgment laid down in  Meera & Company  (supra) inasmuch as it is not a case where any  “Association of Persons” was formed by volition of the parties for  the purpose of generation of income.  This basic test to determine  the status of AoP is absent in the present case.

7. Insofar  as  the  second  question  is  concerned,  that  is  also  covered by another judgment of this Court in Commissioner of Income  Tax, Faridabad vs. Ghanshyam (HUF) reported in (2009) 8 SCC 412,

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albeit, in favour of the Revenue.  In that case, the court drew  distinction between the “interest” earned under Section 28 of the  Land Acquisition Act and the “interest” which is under Section 34  of the said Act.  The Court clarified that whereas compensation  given to the assessee of the land acquired would be 'income', the  enhanced  compensation/consideration  becomes  income  by  virtue  of  Section 45(5)(b) of the Income Tax Act.  The question was whether  it will cover “interest” and if so, what would be the year of  taxability.  The position in this respect is explained in paras 49  and 50 of the judgment which make the following reading:

“49.  As  discussed  hereinabove,  Section  23(1-A)  provides for additional amount.  It takes care of the  increase in the value at the rate of 12% per annum.  Similarly, under Section 23(2) of the 1894 Act there  is  a  provision  for  solatium  which  also  represents  part of the enhanced compensation.  Similarly, Section  28  empowers  the  court  in  its  discretion  to  award  interest on the excess amount of compensation over and  above what is awarded by the Collector.  It includes  additional amount under Section 23(1-A) and solatium  under Section 23(2) of the said Act.  Section 28 of  the 1894 Act applies only in respect of the excess  amount determined by the court after reference under  Section  18  of  the  1894  Act.   It  depends  upon  the  claim, unlike interest under section 34 which depends  on undue delay in making the award.

50. It is true that “interest” is not compensation.  It is equally true that Section 45(5) of the 1961 Act  refers to compensation.  But as discussed hereinabove,

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we have to go by the provisions of the 1894 Act which  awards “interest” both as an accretion in the value of  the  lands  acquired  and  interest  for  undue  delay.  Interest  under  Section  28  unlike  interest  under  Section 34 is an accretion to the value, hence it is a  part of enhanced compensation or consideration which  is not the case with interest under Section 34 of the  1894 Act.  So also additional amount under Section 23  (1-A) and solatium under Section 23(2) of the 1961 Act  forms  part  of  enhanced  compensation  under  Section  45(5)(b) of the 1961 Act.”

8. It is clear from the above that whereas interest under  Section 34 is not treated as a part of income subject to tax, the  interest  earned  under  Section  28,  which  is  on  enhanced  compensation, is treated as a accretion to the value and therefore,  part  of  the  enhanced  compensation  or  consideration  making  it  exigible  to  tax.   After  holding  that  interest  on  enhanced  compensation under Section 28 of 1894 Act is taxable, the Court  dealt with the other aspect namely, the year of tax and answered  this question by holding that it has to be tested on receipt basis,  which means it would be taxed in the year in which it is received.  It  would  mean  that  converse  position  i.e.  spread  over  of  this  interest on accrual basis is not permissible.  Here again, we would  like to reproduce the discussion contained in paras 53 and 54 which  gives the rational in coming to the said conclusion.  Paras 53 and  54 read as under:

“53.  The scheme of Section 45(5) of the 1961 Act  was  inserted  w.e.f.  1-4-1988  as  an  overriding

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provision.  As stated above, compensation under the  L.A.Act, 1894, arises and is payable in multiple  stages which does not happen in cases of transfers  by sale, etc.  Hence, the legislature had to step  in and say that as and when the assessee claimant  is in receipt of enhanced compensation it shall be  treated  as  “deemed  income”  and  taxed  on  receipt  basis.   Our  above  understanding  is  supported  by  insertion of clause (c) in Section 45(5) w.e.f. 1- 4-2004  and  Section  155(16)  which  refers  to  a  situation of a subsequent reduction by the court,  tribunal  or  other  authority  and  recomputation/  amendment of the assessment order.

54.  Section  45  (5)  read  as  a  whole  [including  clause (c)] not only deals with reworking as urged  on behalf of the assessee but also with the change  in  the  full  value  of  the  consideration  (computation)  and  since  the  enhanced  compensation/consideration  (including  interest  under Section 28 of the 1894 Act) becomes payable/  paid under the 1894 Act at different stages, the  receipt  of  such  enhanced  compensation/  consideration is to be taxed in the year of receipt  subject  to  adjustment,  if  any,  under  Section  155(16) of the 1961 Act, later on.  Hence, the year  in which enhanced compensation is received is the  year of taxability.  Consequently, even in cases  where pending appeal, the court/tribunal/authority  before  which  appeal  is  pending,  permits  the  claimant to withdraw against security or otherwise  the  enhanced  compensation  (which  is  in  dispute),  the same is liable to be taxed under Section 45(5)  of the 1961 Act.  This is the scheme of Section  45(5) and Section 155(16) of the 1961 Act.  We may

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clarify that even before the insertion of Section  45(5)(c) and Section 155(16) w.e.f. 1-4-2004, the  receipt  of  enhanced  compensation  under  Section  45(5)(b) was taxable in the year of receipt which  is  only  reinforced  by  insertion  of  clause  (c)  because the right to receive payment under the 1894  Act is not in doubt.”

0. In view of the above discussion, we allow these appeals in  part and set aside that portion of the impugned judgment of the  High  Court  whereby  spread  over  of  the  interest  received  under  section 28 of the 1894 Act, on the enhanced income is allowed with  the direction that it would be taxed in the year in which such  interest on enhanced compensation was received.

.........................J. [ J. CHELAMESWAR ]

…........................J. [ A.K. SIKRI ]

NEW DELHI SEPTEMBER 04, 2014